Charles Arlinghaus: The complicated question of state employee pay

Every two years, state employee pay and benefits are a big part of the budget battle, yet most policymakers have only vague concepts of whether state workers are the largest expense in the budget and how well compensated they are.

The new state budget includes a 6.2 percent raise brought in at the last minute with some incentives to try and control health care costs. The state employees eventually turned down the contract their leaders negotiated, but the money is still part of the budget document.

The average state legislator will tell you that state employees are the biggest cost in the budget. Most think employees make less than private-sector workers in salary, but considerably more in benefits. Each of these bits of conventional wisdom has an element of truth, though each also can be misleading.

State employees are the biggest budget cost if you aggregate them and don't aggregate other expenditures. But that tells us little. What do we know about employee costs and growth?

In 2012, the average state employee made $46,559, and there were a few more than 9,200 of them. In 2005, the number of state classified employees (not political appointees) was about 9,600. It increased to 10,300 in 2008 and then declined each year through 2012 (we don't have data yet for the year ending this week, but employment is up probably to 2005 levels).

Add together the current 9,200 and other employees not counted in that number, and salary costs were about $500 million (a little more if we add in federal payroll taxes). Health benefits are self-insured by the state and cost $175 million for current employees (and another $75 million for retirees). Add to that roughly $700 million another $50 million or so in annual payments into the retirement system to not quite cover the future cost of currently accruing pension benefits.

Those items together aren't actually the largest cost of government. For example, aid to cities and towns comes in at more than $1 billion each year, but that is spread over 15 different programs. Regardless, employee costs are a large and very visible expense.

State government in 2012 spent about $4.9 billion, so employee salaries and benefits amount to approximately 15 percent of the state's budget. Fiscal hawks are wise to pay attention to salaries but should remember that 85 percent of potential savings lie elsewhere.

The negotiated employee pay raise in the current budget has led to some focus on salaries. Employee compensation has increased every year in recent history. In fact, from 2004-2012 the average state employee salary increased by 40 percent — about twice as fast as private-sector salaries.

Inside that number are two very different periods: In the five years from 2004-2009, state workers saw an astounding 36 percent increase in pay, rising quickly to salaries higher than in the private sector. However, in the following three years, salaries increased by a scant 2 percent. There's fodder for either side in those numbers.

It is worth noting that benefits are quite generous, in fact the most generous in the country by far. Family coverage for New Hampshire state employees costs $26,000 while the statewide average for private citizens is about $17,000. New Hampshire's benefits are 50 percent more generous than the average for state employees nationally, with less cost-sharing than all but two states.

Health insurance is more expensive in New Hampshire than in any state but Massachusetts, according to the recent Kaiser Foundation survey, but the significantly greater-than-average cost for the state plan despite a large pool and the advantage of self-insurance is an indicator of the generosity of the plan.

When the state switched to self-insurance in the Benson administration, health care costs had been increasing by 20 percent per year. The average growth under the new system is 6.2 percent per year, a dramatic improvement, but still faster than most compensation categories.

In addition, only 22 percent of private workers have defined benefit contribution plans like the generous (and almost bankrupt) state retirement plan.

State employee compensation will always remain a focus of budget policy, as it is one of the largest cost drivers. But at 15 percent of the state budget, it is only one factor in managing the growth of government.

State worker compensation is about more than salaries. Salary numbers are easier to control and understand. Health care costs increase significantly each year, limiting the amount of money available for salaries. In negotiating a salary and benefit package, negotiators on both sides need to create incentives for employees to help manage health care costs or salary changes won't be possible.

Charles Arlinghaus is president of the Josiah Bartlett Center for Public Policy, a free market think tank based in Concord. He can be reached at Arlinghaus@jbartlett.org.